Standing Committee A

[Mr John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and - Schedule 2 - Disclosure of value added tax avoidance schemes

Howard Flight: I beg to move amendment No. 7, in
schedule 2, page 257, line 22, at end insert 
 'and the Treasury shall with any such designation provide details of the circumstances in which they believe such a tax advantage may be obtained.'.

John McWilliam: With this it will be convenient to discuss amendment No. 8, in
schedule 2, page 257, line 37, leave out from 'the' to end of line 38 and insert 
 'main benefit of the scheme is the obtaining of a tax advantage by any person in the circumstances specified in the designation of the provision by the Treasury in accordance with paragraph 4(1).'.

Howard Flight: I welcome you to the Chair, Mr. McWilliam. In addressing the two amendments, I hope that the Economic Secretary will deal with some of the problematic issues that we did not cover entirely during the debate on clause 19, which was the introduction to the contents of schedule 2, and in particular with some of the practical problems raised by the Institute of Chartered Accountants.

John McWilliam: Order. Just in case I have misunderstood the hon. Gentleman, my colleague suggested at the closing of the previous sitting that he was not minded to allow a debate on schedule stand part, so it would seem to me that rather more than an introduction to the schedule took place.

Howard Flight: I thank you for your comments, Mr. McWilliam. There was discussion as to whether there should have been a broad debate on clause 19—the introductory clause—or schedule 2. There was a stand part debate on clause 19 covering the whole territory. I was merely making the point that the Economic Secretary has not yet responded to some of the issues raised in that debate that are relevant to the two amendments.
 The amendments are designed to bring better proportionality to the proposed measures in the schedule. As pointed out, the provisions are likely to result in excessive and unnecessary compliance burdens and costs for business. Equally, as has occurred in the USA, they are likely to lead to Customs and Excise being snowed under with reports, especially where the requirements are too loosely drawn for businesses with a turnover of more than £10 million. How many extra Customs and Excise staff are the Government proposing to take on to deal with the processing of reports? 
 As with many other measures that have been introduced, such as the lowering of tax rates on small businesses that are incorporated, the Government fail to heed our warning on this matter at their own risk. Hon. Members will appreciate that schedule 2 provides two different, wide-ranging sets of powers for Customs and Excise to be defined and determined in regulations. However, even if the regulations confine reporting objectives to specific schemes, they are unlikely to reduce the potential burdens on Customs or business. 
 Amendment No. 7 would require the Treasury to include in any scheme designation details of the way in which the designated provision may be used to avoid VAT. The objective is to assist business in complying with VAT scheme reporting obligations in respect of such arrangements, and, with regard to paragraph 5, to make it impossible for Customs and Excise to overdesignate or designate provisions without supporting explanations of the nature of the abusive scheme that it seeks to deal with. 
 Amendment No. 8 has two purposes. First, it would substitute a main benefit approach for the existing main purpose approach test in paragraph 5. The Inland Revenue clauses later in the Bill apply a benefit test rather than a purpose one. We suggest that taking the benefit rather than the purpose route would make the objective of providing more objectivity in defining the application of the clause more achievable. It should be easier to define the benefits that flow from an arrangement than to determine their purpose, which will inevitably be subjective and will reflect what the individuals in any business that has put such arrangements in place think that the purpose might be. In our view, the VAT clauses should follow the same approach as the later Revenue clauses. 
 Secondly, the amendment would tie the reporting requirement to the sort of arrangements that the Treasury had in mind in designating the provisions. The combined objectives and intended effects of our two amendments would be to reduce the number of cases to which the provisions could apply, without reducing their effectiveness, and to lessen the potential for snowing under of the Customs and Excise officials involved in operating the measures in schedule 2.

John Burnett: I welcome you to the Chair, Mr. McWilliam. I have served under your wise chairmanship on many occasions in the past.
 I will make a general point, because this is my first time in this Committee Upstairs, although I have spoken in debates on the Floor of the House. That point is that the Finance Bill is scattered with anti-avoidance provisions. Hon. Members of all parties will welcome such provisions, but we should not forget a principle in British tax law that has been enshrined for at least a century. There was a leading case at the end of the 19th century or the beginning of the 20th, the effect of which is that individuals, companies and trustees can so organise their affairs as to mitigate the tax that is due and payable—whether it be value added tax, income tax, capital gains tax, inheritance tax or whatever. 
 Another problem is that there have been many aggressively marketed, artificial schemes. Ten or 15 years ago, leading cases taken up by the Inland Revenue, such as the Ramsay and the Furniss and Dawson cases, narrowed the ability of taxpayers to use artificial schemes to avoid taxation. It is a very difficult line to tread, but I hope that the Government agree with the general principle that all persons—in tax, persons means individuals, trustees and corporations—can organise their affairs in such a way as to mitigate the tax that they have to pay. 
 I support amendment No. 7, because in dealings with the taxman—Customs and Excise or the Inland Revenue—there must be some balance. We cannot be taxed by fiat of the Customs and Excise—what it believes to be the law. We can be taxed only by what actually is the law. I believe that amendment No. 7 goes a small way towards redressing that balance in favour of the taxpayer. 
 I am grateful to the Law Society for providing a few examples of fairly simple and straightforward steps that are ordinarily taken by VAT payers. For instance, a company can obtain a tax advantage by joining a group of companies for VAT purposes, which in itself may be subject to anti-avoidance provisions. We have to know what Ministers and the Inland Revenue, Treasury and Customs are driving at when they make such provisions in anti-avoidance laws. 
 I also support amendment No. 8, which is a logical amendment to ensure that the test is benefit rather than purpose. I look forward to hearing from the Economic Secretary on those general and specific points.

John McWilliam: Before I call the Economic Secretary, may I remind hon. Members of my colleague's ruling in the last sitting? If anyone wants to make any points on schedule 2, they had better use the vehicle of these two amendments to do it.

John Healey: The amendments relate to the hallmarks scheme, which is the second element of the new disclosure rules. It requires large businesses to disclose use of schemes that have certain provisions, or hallmarks, that are characteristic of avoidance. The objective behind the designation of certain hallmarks that are or are likely to be associated with avoidance schemes is to provide Customs officials with information about new VAT schemes that they do not already know about, which may be avoidance schemes. Early action can then be taken to examine the scheme, and if necessary act against it, either by litigation or by making changes to legislation.
 The hon. Member for Torridge and West Devon (Mr. Burnett) vividly described the challenge that the Revenue faces in this modern age, given modern tax planning and advice. He referred to aggressively marketed and highly artificial schemes. He was not present at the last sitting when we debated at length the points that he raised. With your indulgence, Mr. McWilliam, I shall briefly repeat that the general principle that companies have a right to organise their 
 affairs in such a way as to mitigate tax is correct, but when such activity becomes abusive—in other words, when their action is contrary to the purpose or spirit of the legislation—we move into a different realm. It is right that Customs and the Inland Revenue act to protect the taxpayer and those businesses that pay the full amount of tax that is due; indeed, they have a duty to do so.

Howard Flight: What the Economic Secretary just said is extremely important, in that he set the juxtaposition in which it is accepted that a citizen has the right not to pay more tax than he is legally obliged to pay, although he used the somewhat questionable word ''abusive'' in his definition. A major objection to the hallmarks scheme is that the requirements are worded such that anything other than paying the maximum VAT constitutes a scheme to be reported. I cannot think that that is the Government's intention, as Customs and Excise will be snowed under. That was one of the main criticisms made by the Institute of Chartered Accountants about the drafting.

John Healey: I am aware of that, but it is a serious misrepresentation of the way in which the measure will be brought into effect. Far from being a scheme that will catch anything that is not the fullest possible payment of tax, the hon. Gentleman will be aware—he has had a chance to study the draft statutory instrument—that, as with the listed schemes that we discussed last week, the hallmarks will be designated specifically by Treasury order, subject to affirmative resolution, and therefore debate in the House. Drafts of the order will be exposed for comments one month before it is laid, so it will be subject to consultation and parliamentary scrutiny. The first hallmark will be designated at the same time as the first listed schemes under the same order.
 It is highly unlikely that Customs will be ''snowed under'' by notifications under these provisions. There will be a central unit, as I explained during our proceedings last week, but we anticipate being able to cope well within existing resources to deal with this. The central unit will be staffed by existing staff in Customs who will be redeployed to work in the unit. 
 With the hallmarks scheme, we have designed arrangements to minimise the burdens on business. Any burden need fall only on those who think up such schemes, and we have provided a facility for promoters to remove the disclosure requirement on their customers by making prior disclosure themselves. Promoters who make use of that facility can relieve businesses and clients of any burden. If a business with a turnover of more than £10 million chooses to use a scheme not disclosed by the promoter, it will have to consider whether it needs to be disclosed.

Howard Flight: What the Minister has just said seems to be the nub of the matter, in that we all understand that the intent is that advisers will disclose to the Revenue schemes that will be become hallmark schemes, but he is also saying that if businesses use hallmark schemes, they will have a number, so they should disclose it. Anything that is not hallmarked will be left with the law, which goes back to what is disclosed, what is
 reasonable tax planning and what is potentially a scheme. If you look at the schedule, you find that virtually everything is to be regarded as a scheme unless it maximises tax. How practical are hallmarks for businesses with a turnover of more than £10 million, and what aspects of their normal tax planning must they disclose? That is still not clear.

John McWilliam: Order. Mr. Speaker has asked us to be vigilant about ensuring that all hon. Members stick to the rules. The hon. Gentleman would have been correct in referring to me as ''you'' 30 years ago when I was a tax commissioner, but that is no longer the case.

John Healey: The situation is contrary to the hon. Gentleman's interpretation, and I shall detail the conditions that must be met for a hallmark to be listed. That is likely to be specifically drawn according to particular conditions and is contrary to his wide suggestion that anything that is not the fullest possible payment of tax will become a disclosable activity.
 To finish the point about the burdens on business, the high de minimis will keep the additional burdens to a minimum, and businesses that are required to disclose have only to send an outline of their scheme and disclose the hallmarks involved to Customs. 
 Amendment No. 7 would require the Government to specify the tax advantage that would be obtained through use of a scheme bearing a particular hallmark at a time when they are adding new hallmarks to the law. In other words, it would require the Government to give details of the tax avoidance scheme in which the hallmark features. However, at the time of listing those hallmarks, the Government will not necessarily know the details of the arrangements by which the taxpayer seeks to obtain tax advantage. The very purpose of the hallmarks scheme and the measure is to discover those details, and that purpose would be removed and neutered by the amendment.

John Burnett: Is the Minister saying that the disclosure provisions are so weak and insipid that an educated person in Customs and Excise would be unable to quantify the tax advantage?

John Healey: No. I am going to explain that the purpose of the arrangements is one of the conditions for notification under the scheme. If the hon. Gentleman bears with me, I shall come to that point later.
 Amendment No. 8 would change the definition of a ''notifiable scheme'' so that a hallmark scheme is notifiable only when its main purpose is obtaining the tax advantage under the scheme that would be specified under the first amendment. As I have said, the Government will not necessarily know at that stage what the avoidance scheme is or exactly how it obtains a tax advantage. 
 A scheme is notifiable under the hallmarks provision only if all three of the following conditions are met. First, the main purpose of the scheme, or one of its main purposes, must be the obtaining of a tax advantage for any purpose. Secondly, a person must obtain a tax advantage that includes or is associated with a hallmark provision. Thirdly, the designated hallmarks associated with the scheme must comprise, 
 for instance: confidentiality conditions limiting disclosure of a scheme; sharing the tax advantage with another party to the scheme or with the promoter; and fees payable to a promoter contingent on tax savings. Designated hallmarks included in a scheme must comprise: pre-payments between connected parties; funding by share subscriptions or loans between connected persons; construction work associated with property transactions between connected persons and certain offshore suppliers. It is highly unlikely that ordinary commercial transactions will come within all three requirements. 
 However, some arrangements may have to be reported under the hallmarks provision if the main purpose is to gain a tax advantage but there is, on examination, no tax avoidance. The process allows for that possibility, although we expect that such instances will be few, and that the vast majority of schemes reported are likely to be avoidance. In such instances, a decision will have to be made on whether the scheme is avoidance. That may involve further inquiries or the provision of further information by the business.

John Burnett: Presumably—and I would like the Minister to confirm this—the decision as to whether a scheme falls within the rules is initially made by an official at Customs and Excise. What level of seniority and experience will that person have? Will the decision be appealable, and if so, to whom, or to which court or tribunal?

John Healey: At the risk of going over ground that we have already covered in a previous sitting, I shall explain to the hon. Gentleman that the notification scheme in clause 19 and schedule 2 simply draws to Customs' attention schemes that it would otherwise have to uncover in the normal course of assurance visits. The scheme triggers business as usual for the Customs officer. There will be the same inquiries, examinations, rights of appeal and decisions as there are at present. No change is made to that by the provisions in clause 19 and schedule 2.
 The system proposed in the clause and schedule, which amendments Nos. 7 and 8 would severely curtail, is no different than if an avoidance scheme had come to Customs' attention via a VAT visit or through normal correspondence. The hallmarks disclosure provision simply brings to the attention of Customs matters that would otherwise remain hidden or be identified only much later. In all other respects, it is business as usual. 
 Far from helping the scheme work—or, as the hon. Member for Arundel and South Downs (Mr. Flight) argues, bringing proportionality to the proposal—the amendments would seriously undermine the operation of the measure as the Government intend. It would undermine this element of the Government's anti-avoidance strategy, which plays a vital part in securing revenues and creating a more level playing field for those businesses that fulfil their tax obligations. For that reason, I ask the Committee to reject the amendments.

Howard Flight: There would not be much point in having a vote on the two amendments, but I will make one or two comments.
 First, in preparing the amendments, I consulted a leading anti-avoidance individual who had been working for the Treasury in that capacity for a long time, and was concerned about the issues that I have raised. The Minister's explanation is not entirely convincing, and there is not anywhere near an understanding out there about how the arrangements will operate. The schedule 2 provisions will operate broadly as I have described with regard to larger businesses. There is the danger of being snowed under, with people protecting themselves from being attacked while not reporting something that they should—that will be the gut reaction of every business. The Government and Customs and Excise are unwise if they do not realise that that is how people will naturally and rightly behave. 
 Benefit, rather than purpose, is the correct way to measure this. The Minister has said on many occasions that for any scheme its purpose is self-evidently to reduce the tax burden. However, greater specificity is needed about what is being provided for the Revenue under subsequent clauses. 
 I am left entirely unclear about the duty of a large business in respect of reporting hallmark schemes. If I am left unclear, I am arrogant enough to believe that businesses, too, will not be clear about the arrangements. I beg to ask leave to withdraw the amendment, but I hope that the Minister will think further about the arrangements. No doubt he will discuss them further with outside professionals, but as the schedule stands, the concerns that we have raised are valid. 
 Amendment, by leave, withdrawn.

John McWilliam: May I point out that under Standing Orders, the moment a Member asks permission to withdraw an amendment, I should put that to the Committee? I allowed a little leeway just then.
 Schedule 2 agreed to.

Clause 21 - Reverse charge on gas and electricity

Question proposed, That the clause stand part of the Bill.

Mark Prisk: The clause follows on from EU directive 2003/92, which will be implemented in January 2005. The purpose of that is to change the place of supply for the respective utilities and, therefore, the point of taxation. I have met representatives of the various utility organisations, including the gas and electricity industries, and their view is that the clause is a welcome step. As the Committee will realise, it mitigates an evident anomaly and is a direct response to the previous liberalisation of the markets for utilities. Accordingly, we have no particular problems with it and we welcome what is probably an overdue step.
 Question put and agreed to. 
 Clause 21 ordered to stand part of the Bill.

Clause 22 - Use of stock in trade cars for consideration

Question proposed, That the clause stand part of the Bill.

Mark Prisk: We skate gently from gas and electricity to motor vehicles.
 As I understand it, clause 22 changes the basis for valuing the taxable benefit of the private use of motor dealers' demonstrator cars and other cars that are in the ownership of a particular enterprise. I have three areas of concern and they reflect discussions with those who are affected. I have talked with representatives of the Society of Motor Manufacturers and Traders and I have listened to their concerns. It has become clear that the alleged avoidance method—the nominal valuation—is not something that they reported as being used by the society's member companies. Clearly, somebody must be using it, or the Government would not be alleging that there is avoidance. 
 I also understand that an estimated £5 million of additional revenue is anticipated from the closing of the alleged loophole. What studies have been made of who is engaging in the avoidance and what proportion of the market it represents? If the leading trade bodies are unaware of that particular approach, one wonders what is the evidence for the basis of the clause. 
 The experts in the field have asked whether the nominal value would have the effect of avoiding a significant VAT charge, as it is alleged. On subsection (2), the Chartered Institute of Taxation, which is a leader in this field, said: 
''We are not altogether convinced that a nominal value (the sum of £1 for two years' use is cited . . . ) would in normal circumstances have the desired consequence of avoiding a significant VAT charge.''
 It then went on to cite the case of the European Commission and France. It is not often that one hears those two litigants involved in the same thing, but it is a mild pleasure. I would like the Minister to respond to that particular case, because it was applied in UK law terms in the case of Customs and Excise commissioners and the Yarburgh Children's Trust. 
 The essence of the matter is whether the nominal value approach will secure the significant reduction in the VAT that is argued. I am sure that the Minister will be able to respond to that, but I am not sure whether he will be willing to. I hope that he will. I confess that it is not a case with which I am intimately familiar, but it is important. If the leading experts in the tax field question whether the effect of the clause is as stated, it is important that we understand what the Government's response is. 
 Lastly, there is the question of the definition of open market value. The proposal is to base it on price charge by comparing it to private rental businesses. Even someone who is not an expert in that particular field, such as myself, will understand that it is difficult to make a direct comparison between the typical contractual arrangements in the open market of car 
 rental businesses and an employee who is making the occasional use of a demonstrator vehicle of their employers' ownership. If you were an employee who used a demonstrator car there would be restrictions that are not applicable in the former case. The car would be required to be available on the forecourt first thing every morning, and perhaps throughout the day. More importantly, there would be a constraint on the mileage useable by that individual; that is not a condition that most car rental businesses impose. There would also be a difference between the vehicle condition required by the employee of the car dealership and that required by the person renting a vehicle. 
 All those aspects affect value. They are different from the conditions of a private rental business and they change the open market value. The essence of my point is the concept of free use. Will the Minister explain the basis of open market value that the Government are applying here? Do the Government accept that making this direct comparison in value terms might not be appropriate? There are other forms; I draw the Committee's attention to that of the full cost of providing service, where the concept of free use is appropriate.

John McWilliam: Order. The word ''you'' should not be used; I have never sold a car except at an extreme loss to myself.

John Healey: I will deal with the questions of the hon. Member for Hertford and Stortford (Mr. Prisk) on the nature of the avoidance and who is involved during the course of my explanation of clause 22. I will also do my best to explain the relevance and the operation of nominal value and the case for moving to a market valuation.
 The hon. Gentleman asked about losses. They are currently estimated at £5 million a year. That is not a theoretical loss: the estimate is based on abuses that are currently taking place and are known to Customs officials. If this scheme were to be expanded to its full capacity, it is estimated that the annual loss would be between £20 million and £25 million.

Mark Prisk: Will the Minister answer my specific question by giving the Committee some idea of the proportion of the market that is engaging in such avoidance?

John Healey: As I have said, I will do my best to answer that in the course of my remarks.
 Clause 22 counters a serious VAT avoidance scheme as part of our wider determination to clamp down on artificial and abusive tax avoidance activity. The changes that we are making will tackle underpayments of VAT on the private use of demonstrator cars—cars that are used in the motor trade for demonstration purposes but that are also made available to sales staff for their private purposes on weekends and evenings and at other times when they are not being shown to customers. Using a tax avoidance scheme promoted by many tax advisers, some motor dealers and manufacturers are paying a only tiny fraction of the VAT that they ought to pay when they make demonstrator cars available to employees. 
 Where a demonstrator car is not used wholly for business, dealers and manufacturers are required to account for tax on the provision of the car to the employee for private use. That is based on the full cost of providing the car. Using rates agreed with the major motor trade bodies, the VAT due is normally about £120 to £140 per employee per year. However, by charging the employee a nominal sum for the use of the car—typically £1 for a couple of years' use—some businesses have at a stroke been able to limit their tax exposure to the VAT on only this nominal amount. To answer the hon. Gentleman's question, this avoidance scheme works because in VAT even the smallest amount of consideration—even £1 a year—counts as payment for a supply. The result of this is the loss of virtually all the tax that should be due. 
 I have explained the scale of the current revenue loss and the scale of the full revenue loss if the scheme were to be expanded to full capacity. For some of the larger businesses in the motor trade, the loss runs to hundreds of thousands of pounds a year. The changes that we are making will give Customs the power to direct an open market valuation when a car is supplied for a consideration by a motor dealer or manufacturer to an employee and its value is artificially low.

Mark Prisk: My understanding is that the Chartered Institute of Taxation questions whether making this nominal value would achieve the aim on the basis that the £1 charge for, notionally, two years would not be considered to be in the course or furtherance of business. It would not enable a business to seek exemption from the VAT charge. Is the institute correct in making that assessment?

John Healey: I had understood the hon. Gentleman's explanation of why this avoidance scheme would not work to be related to a concern about the interpretation of the law. The clause is a direct response to the avoidance that we know takes place. I have tried to explain why and how the use of a nominal payment that constitutes a consideration allows an avoidance in this field that is not available to employees in other fields. That is why we are looking to close the scheme.

Mark Prisk: I am trying to say that the very fact that it is questionable whether the nominal charge enables a business to make itself exempt in these circumstances means that Customs and Excise already has the powers, because such a payment would not be made in the course or furtherance of business. Therefore, even if the Treasury's view is that this is an attempt to avoid tax, the clause is unnecessary because Customs already has the powers to challenge such nominal payments.

John Healey: I have tried to avoid giving a blunt answer to the hon. Gentleman. He has asked me the same question a third time, so I will say that, in our view, the Chartered Institute of Taxation is wrong. Any small amounts of consideration—even a pound a year or a pound over two years—is regarded in tax law as being received in the course of business. That is why the scheme works and why it allows the payment of VAT on only that nominal value.
 What we propose in the clause requires a European Community derogation, which we applied for in February. The changes will take effect following receipt of the derogation on a day to be appointed by the Treasury. The measure is proportionate, necessary and a targeted response directed at the avoidance of VAT on company cars used as demonstrator cars. Car salesmen at present are getting away with avoiding the VAT on their company cars that other businesses have to pay. This measure will put an end to that.

Mark Prisk: I am interested in the Minister's comments on whether the notional payment is a consideration. Unless I have missed the point, I did not hear any explanation from him—I am sure that it is an omission on his part—on open market value and rental businesses. Does he have any comments in response to those points?

John Healey: I will write to the hon. Gentleman about open market valuation and about the issue of free use, which he also raised.
 Question put and agreed to. 
 Clause 22 ordered to stand part of the Bill.

Clause 23 - Charge and rates for 2004–05

Question proposed, That the clause stand part of the Bill.

Howard Flight: We are pleased to note that the RPIX is effectively being applied to indexing personal allowances. We also note the continuing wide gap between that and the new consumer price index pick-up measure. Notwithstanding that, there will be substantial fiscal drag as earnings, especially overall earnings in the public sector, rise faster than inflation. We are interested to know how many people are now paying tax in the top 40 per cent. bracket, and how many more the Government anticipate will be paying tax in that bracket after this year's Finance Bill.

Dawn Primarolo: I do not have to hand the precise figures on the number of people moving into the higher rate, but they are published regularly and I will ensure that the hon. Gentleman receives them. He needs to be reminded of the signs of prosperity in the economy. Between 1997–98 and 2002–03, average earnings for men and women of all talents increased by 25 per cent., whereas prices only went up by 12 per cent. The sign of a prosperous economy in which people are earning more is that some of them move into the higher rate band.
 The hon. Gentleman will also be aware that the interaction of the tax credits and the 10p starting rate is ensuring that those on the lowest incomes are retaining as much as possible, and in particular are avoiding the regressive nature of many changing allowances, which, as he knows, is more of a benefit for those at the top of the income range. 
 I have already provided a written parliamentary answer to the hon. Gentleman. Perhaps the information has escaped his notice. I am happy to ensure that that information, which is contained on the Inland Revenue website, is made available to him and the Committee. 
 Question put and agreed to. 
 Clause 23 ordered to stand part of the Bill.

Clause 24 - Personal allowances for those aged 65 or more

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause serves to increase age-related personal allowances by 3.3 per cent., together with related income limits. Why has there been special treatment for this category of people, when the basic personal allowances—the age-related allowance for married couples and the blind persons allowance—have all been based on RPIX at 2.8 per cent.? What is the logic for having 3.3 per cent. for one group, while others, which are apparently equally worthy, have only 2.8 per cent.?

Dawn Primarolo: This is to be consistent with the Government's promises elsewhere on average earnings. The Government increased the guaranteed element of the pension credit by using the July average earnings seasonally adjusted headline rate, and promised to continue to do that for the remainder of the Parliament. Accordingly, we have used the July average earnings measure this year, as in previous years, because of clear commitments that the Government made in this area.
 Question put and agreed to. 
 Clause 24 ordered to stand part of the Bill.

Clause 25 - Charge and main rate for financial year 2005

Question proposed, That the clause stand part of the Bill.

Howard Flight: A year ago, the main corporation rate for this year was set at 30 per cent. As I understand it, corporation tax bands are not changed, which in a sense means that the value is eroded with inflation. Does the Minister know whether the Government intend not to make any changes to corporation tax bands in future?

Dawn Primarolo: Much as I am tempted to make announcements for the Chancellor for future years, I shall not do so. However, the answer to the hon. Gentleman's question about whether we keep the competitive rate of corporation tax under review is yes. The Chancellor always seeks—in setting the headline rate on corporation tax, or the various allowances and interactions in the tax system—to ensure that our corporate tax system is highly competitive as it is and still one of the lowest in Europe. Our competitive advantage remains.

John McWilliam: Order. I have to point out that the clause is about the year 2005 only and not about any other year.
 Question put and agreed to. 
 Clause 25 ordered to stand part of the Bill.

Clause 26 - Small companies' rate and fraction

Question proposed, That the clause stand part of the Bill.

John McWilliam: This clause is about 2004.

Howard Flight: The clause sets the starting rate of tax for small companies for this year. The key point is that, under the new corporate distribution rate, the starting rate for the overwhelming majority of small companies will be 19 per cent. and not zero per cent.
 Question put and agreed to. 
 Clause 26 ordered to stand part of the Bill. 
 Clause 27 ordered to stand part of the Bill.

Clause 29 - Special rates of tax applicable to trusts

Howard Flight: I beg to move amendment No. 57, in
clause 29, page 23, line 35, leave out subsection (4).

John McWilliam: With this it will be convenient to discuss the following:
 Schedule 4—Amendments relating to the rate applicable to trusts 
 New clause 1—Repeal of section 677 of Taxes Act 1988 
'Section 677 of the Taxes Act 1988 (sums paid to settlor otherwise than as income) is hereby repealed.'.
 I suggest to hon. Members that it is probably useful if they include anything that they would like to say on clause 29 stand part now.

Howard Flight: I thank you, Mr. McWilliam, for the comments that you have just made, because the territory is very much interrelated. In the course of my remarks, I want to make a point about amendment No. 31, which, for technical reasons, has not been selected, but is a central part of the point here.
 Both clause 29 and schedule 4 increase the income tax rates for non-interest in possession trusts—discretionary and accumulation trusts—from 25 per cent. to 32.5 per cent. and for UK company dividend income from 34 per cent. to 40 per cent. That opens up what we perceive as an unfair imbalance in the treatment of UK company dividends. Whereas higher-rate taxpayers are taxed at 25 per cent., the income received by the beneficiary in a non-interest in possession trust will be taxed at 40 per cent. I think that that will also apply to pension-saving arrangements that fall under the funded unapproved retirement benefit scheme, or FURBS. 
 Next year, the Government are proposing sensible measures for streaming that I describe as automatic look-through. At the least, I ask why the tax is being put up a year ahead of that, which will result in a year of unfairness, and why it would not be more sensible to combine the two in the same tax year and to delay the tax increase for another year. 
 I had an extraordinary constituency case, where a little girl's father died at 35, leaving her £10,000. Her grandfather put that into a discretionary trust. He was going up the wall because he was already having tax estopped on it and could not get it back from the Revenue. He said, ''I hear that the rate is now going up to 40 per cent. What sort of justice is that? The amount involved is tiny.'' I said to him, ''As I understand it, in another year you would be alright because it would be a straightforward look-through situation, but I am afraid that this year, for some half-baked reason, you will have to pay even more tax, unless we can persuade the Government to coincide the two measures.'' 
 New clause 1 would abolish section 677. We see no need for schedule 4, which introduces consequential amendments arising from the increases to the schedule F trusts rate and the rate applicable to trusts. Moreover, it complicates an already over-complex situation. The essence of the point is that, if we deal with the whole lot together, once we move to stream the higher tax rates, we do not need section 677 or schedule 4. 
 Certain capital sums paid to a settlor are taxed as income by section 677 when there is undistributed income in the trust. Schedule 4 introduces yet more complex first-in and first-out matching rules to relate the tax credit received by the settlor to the tax paid by the trustees. We would welcome an explanation of the provision, which appears to be a little capricious. Already the problems with sections 677 and 678 are made worse by schedule 4. The explanatory notes have turned up in the past day or two but, when I and others focused on this area, we did not have the explanatory notes to sort out some of the problems. 
 Section 677 could be repealed given that UK trust income is increasing to the new 40 per cent. rate. The key point is that, once the tax rate has been increased, you do not need all the clutter that section 677 and schedule 4 bring. There will be virtually no accompanying tax revenues once the rate has been upped to 40 per cent. The amount of tax at stake will diminish over the years as the amount of undistributed income that has suffered tax at rates of less than 40 per cent. reduces over that time. The related rules of section 678—capital sums paid by a body connected with the settlement—will become similarly redundant over time. 
 To sum up, it seems extraordinary that the Government are not dealing with the new tax rate and streaming at the same time. If both were dealt with at the same time, you could simplify an area of taxation that is ludicrously complex, and made more complex by the provisions of schedule 4, for little or no loss of revenue.

John McWilliam: Just to remind members of the Committee, it is 30 years since I have been the trustee of anything. The word ''you'' is being used too often.

John Burnett: I want to address my comments to amendment No. 31. It is a popular misconception that all beneficiaries of non-interest in possession trusts are—

John McWilliam: Order. That amendment has not been selected. However, the argument can be made.

John Burnett: All I can say is that I am anxious to speak to that amendment. I am not moving it.

John McWilliam: Order. For the sake of clarity, it is not possible to move the amendment, because the amendment is out of order. I accept that it is out of order on a technicality, but I suggested to hon. Members that they should take the group of amendments and clause stand part together. The argument is in order.

John Burnett: I shall therefore proceed to make the argument—[Interruption.] I am willing to give way to the hon. Member for Ealing, North (Mr. Pound), who, if we are very fortunate, might regale us with details of his naval career.
 It is a popular misconception that only the very rich are beneficiaries of non-interest in possession trusts. That idea is wrong for various reasons. Often, for example, simple mitigation of tax, with property prices being so high, will involve, on the death of a first spouse, the creation for at least two years of a non-interest in possession trust—a nil rate inheritance tax trust. There could be 10 beneficiaries of that trust, including the surviving spouse, and many of those beneficiaries could be extremely badly off. I do not understand why the Government have a fair system in place for the next tax year and a patently unfair system for this tax year.

Howard Flight: It is not just patently unfair, but made more unfair by the increase in the rate to 40 per cent.

John Burnett: That is absolutely right. For that reason I hope that the amendment will be pressed to a Division, unless the Government accept it, because we support it. It is patently unfair to discriminate doubly for one year against many individuals who are low-rate taxpayers, thus ensuring that they pay considerably more tax.

Howard Flight: Tragically, we cannot specifically vote on the measure as the amendment has not been selected. Therefore, unless the Government can satisfy us that they will deal with the issue, the only possibility is to vote against the clause.

John Burnett: I understand that, but we have to be very careful in the Committee because we might want to keep our powder dry until Report. Nevertheless, I hope that we shall receive from the Paymaster General, who is invariably generous and courteous, some words of compromise and sense.

Dawn Primarolo: I hope that in explaining clause 29 and schedule 4 to the Committee, and responding to the amendments, I will also be able to address the specific point about the future changes to trusts, about which the Government are currently consulting, and how they will interact with the clause. I hope that hon. Members will then be satisfied that the calamitous situation that they believe possible will not come to pass.
 Clause 29 changes the applicable rate for trusts from 34 per cent. to 40 per cent., and the corresponding schedule F trust rate from 25 per cent. to 32.5 per cent. The rate applicable to trusts has traditionally been set above the basic rate, which 
 reflects the fact that many—but, as the hon. Member for Arundel and South Downs said, not necessarily all—of the ultimate beneficiaries are liable to the higher rate tax. Higher rate taxpayers still can, and do, achieve an unfair tax saving by channelling their income through trusts. Increasing the rate applicable to trusts ensures that the right amount of tax is paid by the higher rate taxpayer. 
 The ultimate tax liability of the beneficiaries who receive income from a trust will not be affected by the increase in the rate applicable to trusts. Beneficiaries will continue to get a credit for the tax paid by the trustees so that higher rate taxpayers will not have to pay any more tax when trust income is paid to them. Beneficiaries who are not liable for income tax, or are liable at the starting or basic rate, will be able to claim the repayment, as is the case at the moment. 
 Clause 29 and schedule 4 are part of a wider package of changes that will modernise the way that we tax trusts.

Howard Flight: Will the Paymaster General give way?

Dawn Primarolo: If the hon. Gentleman will let me finish this point, I shall give way to him. The changes will reduce the compliance burdens faced by smaller trusts. From the tax year 2005–06, there will be a £500 basic rate band for trusts that pay tax at the rate applicable to trusts. Trusts established for the most vulnerable will benefit from the new rules; the trustees will be taxed only at the vulnerable beneficiaries tax rate.
 This is a complex area. The Inland Revenue has consulted widely on it, which has been welcome. That consultation continues, and it is designed to ensure that all the details are correct. The provisions will ensure that trusts for the vulnerable do not pay more tax. In many cases, they will pay less, and it will be backdated. 
Mr. Flight rose—

Dawn Primarolo: I knew that that would be the crucial point. The measures will be backdated to come into effect in 2004, even though we will require legislation in 2005. The reason for that is that although these changes are widely welcomed, there are still more details that we want to ensure are correct. That is the right way to proceed.

Howard Flight: The Minister has uttered the magic words.
 When I was making inquiries in relation to the constituency case that I mentioned, I was surprised to find that, historically, there seemed to be ludicrous complexity about whether there could be a straight look through. The case is straightforward. There is an orphaned daughter. Money was the father's only savings. The mother is still alive. A trust has been set up in favour of the daughter, and it has been organised by the grandfather to protect her against the possibility of the mother walking off with the money. However, the child has to pay tax on the income on £10,000. It is extraordinary that the rules result in that. I hope that I am right in understanding that once the new streaming arrangements have been sorted out they will give a complete look through.

Dawn Primarolo: With your leave, Mr. McWilliam, I will briefly touch on the proposed modernisation. The hon. Members for Arundel and South Downs and for Torridge and West Devon know full well that this is a very complicated area of taxation. All manner of arrangements—to put this delicately—can be found in it, ranging from vulnerable trusts, for which all Committee members want the Government to make the necessary arrangements to simplify the provisions, to extremely creative high taxpayers who seek to reduce their tax unreasonably.
 That is unfortunate, and it provides a challenge for the Government. I will explain it by addressing the points that were made about the changes in section 677 of the Income and Corporation Taxes Act 1988. The changes in the arrangements that we are seeking to make are designed to ensure that we meet that challenge. With regard to the operation of section 677 and anti-avoidance, we are still dealing with higher rate taxpayers, and we are also reviewing, updating and modernising trust arrangements and the tax system for trusts so that we pick up the points that the hon. Gentlemen are rightly making. 
 The new system will involve an irrevocable election made jointly by trustees and the vulnerable beneficiary for the tax paid by the trustees to be based on the circumstances of the vulnerable beneficiary. It is difficult to comment on the constituency case of the hon. Member for Arundel and South Downs, but then I always marvel at the complexity of his casework. No one has visited me in Bristol, South inquiring about an offshore trust and the unreasonableness of the 40 per cent. tax rate.

John Burnett: On the point to which the Paymaster General has alluded, I think that she said that, on the inception of a trust for a vulnerable person, the election would have to be made by the settler trustees and the vulnerable person. I hope that in due course she will reconsider that, if it is so, because sometimes the vulnerable person is not capable of making an election and might refrain from doing so because they would not want the property put in trust.
Mr. Flight rose—

Dawn Primarolo: I will just answer that question before I give way to the hon. Gentleman.
 I beg your indulgence, Mr. McWilliam, as we are going quite wide of the subject. The points that the hon. Member for Torridge and West Devon raised are precisely those on which we need further consultation, to ensure that we get that balance right. He is right: it is not straightforward. It is simple for a Minister to say that we wish a measure to apply as a principle, but we have to ensure that it is delivered in the circumstances that we seek to achieve. 
 The hon. Gentlemen will have to be disappointed this year that the provisions are not available in the Bill. I hope that they will look forward with expectation and encouragement to the legislation next year making an appropriate response to these matters. 
Mr. Flight rose—

Dawn Primarolo: I want to get this matter out of the way so that I do not stray too far from the amendments, so before I give way I point out that the other issues that we are considering are the basic rate band, the £500, and harmonising definitions and tests. There is broad consensus that we should have a common definition of trust income tax and capital gains tax. As the hon. Member for Arundel and South Downs said, there is also the question of streaming income and ensuring that it is right to deliver the things that he correctly identified in circumstances where it would be appropriate.
 I do not plan to say anything about next year's Finance Bill. I was trying to be helpful with regard to current consultation in the context of clause 29. I will give way to the hon. Gentleman and then return to the amendments.

John McWilliam: Order. We are so wide that sometimes I feel as though I have been transported to the steppes.

Howard Flight: Just to put the record straight, the case in question concerned a trust that was entirely domestic, and these measures are essentially about domestic trusts. It was also modest, with only £10,000, and illustrated the correct use of trusts. A grandfather was simply trying to protect what little his deceased son had received for the benefit of an orphaned child.

Dawn Primarolo: I think that I answered the hon. Gentleman's point when I said that all the arrangements for all those who benefit from such trusts will be backdated. I hope that that settles the point. We should not stray any further.
 Amendment No. 57 would omit schedule 4 from the Bill. That moves to the other half of the challenge that the Inland Revenue faces in dealing with trusts, where avoidance by extremely wealthy individuals may inadvertently occur, to put it delicately. We are seeking, as an ever-helpful Inland Revenue and assisted Minister, to ensure that the clauses continue to work as intended. 
 New clause 1 and amendment No. 57 would repeal section 677 of the Income and Corporation Taxes Act 1988, which charges tax on capital payments made by trusts to the individuals who put funds into the trust. The amendment and the new clause would create new opportunities for tax avoidance. Section 677 contains anti-avoidance legislation to stop individuals who put funds into a trust avoiding tax when they withdraw funds from it. New clause 1 would sweep section 677 aside, but section 677 is a necessary defence against avoidance. If it did not exist, people could place funds in an offshore trust that paid little or no tax on its income and arrangements could later be made for funds to be returned to them in a non-taxable form, thereby avoiding tax altogether. That is just not acceptable. Such schemes are not caught by any other anti-avoidance measure, and I hope that the Committee will understand why section 677 is a necessary part of the tax system and new clause 1 should be rejected. 
 Schedule 4 simply ensures that the proposed change in the rate applicable to trusts is taken into account when section 677 operates. In the simplest case, it ensures that a person receiving a capital payment from a resident trust does not get credit for tax paid at 40 per cent. if the trust had paid only 34 per cent. In the worst case, someone could receive a credit at 40 per cent. when no UK tax had been paid. The amendment, by omitting schedule 4, would make nonsense of the tax credit calculation and create a new tax avoidance opportunity for higher rate taxpayers. 
 I hope that the hon. Member for Arundel and South Downs, who said that sections 677 and 678 are highly complex and capricious provisions, sees that the Government's amendment in the schedule is a necessary consequence of the increase in the rate applicable to trusts. Schedule 4 aims to ensure that the tax credit given to a settlor when calculating their income tax liability on a capital payment from the trust more closely matches the tax paid by the trustees. 
 The change to section 677 is necessary to ensure that wealthy settlors pay the right amount of tax. I cannot see why that is unreasonable because everyone else pays the right amount—well, I hope that they do. I certainly do. Without the change, the notional tax credit that they receive would be calculated on the wrong basis. These are anti-avoidance provisions and are necessary to ensure that the right amount of tax is collected in all cases. In any case, the tax revenue at stake would depend enormously on behavioural effects when tax planners are ready and willing to exploit any loophole—this would be a large one—for the benefit of their clients. There is an ongoing risk, because trusts that are based offshore pay no UK tax and that could be used to achieve the avoidance. 
 I hope that the hon. Gentleman accepts my undertakings on trusts for the vulnerable and that he will also, perhaps reluctantly, accept that section 677 is absolutely necessary. If he does not withdraw his amendment, I shall ask my hon. Friends to vote against it.

John Burnett: The Paymaster General has lived up to the billing that I gave her. Softly, gently and subtly, she has won over this Member.

Stephen Pound: The hon. Gentleman has been seduced.

John Burnett: The right hon. Lady frequently seduces me with her words.
 I was delighted to hear what she said. She handles the Committee with great expertise, and did so especially in connection with amendment No. 31. I am delighted to hear that there will be no discrimination against some disadvantaged individuals in this tax year, 2004–05.

Howard Flight: The Paymaster General has indeed responded to our main concern about the commitment to backdate. On the more technical aspects of schedule 4 and section 677, in a domestic context, I trust that the Minister understands the point that I was making.
 I was under the impression that taxation of income from non-UK offshore trusts was done on a look-through basis under other legislation, and that the issue was therefore thoroughly dealt with elsewhere. She is effectively saying that that is not the case, and that there is a reliance on something in section 677. If that is so, I accept her argument. My point was based on the understanding that the section was really about domestic trusts, and did not touch on offshore trusts. On the basis that the Minister knows her stuff—I am sure that she does—I accept the argument that we cannot get rid of section 677 if it is relevant to the offshore territory. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 29 ordered to stand part of the Bill. 
 Schedule 4 agreed to.

Clause 30 - Provision not at arm's length: transactions between UK taxpayers

Question proposed, That the clause stand part of the Bill.

Mark Prisk: We come now to the important, if not easily comprehensible, issue of transfer pricing and thin capitalisation. Clause 30 and schedule 5 change the way in which prices are set between associated businesses for transactions within the United Kingdom. The clause will require arm's-length pricing, and the whole process, of course, will have to be supported by extensive documentation. Committee members will immediately recognise—as I am sure do you, Mr. McWilliam—that that represents, potentially, a huge compliance burden. Given the complexity of UK-UK transfer pricing, I shall give some examples to illustrate my point.
 Let us consider head office costs. Most groups of companies do not make arrangements for each and every transaction or transfer between companies to be priced in the manner required by the legislation, so there will be significant change there, in terms of recharging. UK groups often find that it is easier not to charge interest on intra-group loans; or, at least, if they do charge interest, there is no need to charge at market rates. That will have to change because of the clause. Committee members will realise that it could have a significant adverse effect if loans have to be charged on an arm's-length basis within groups, as is required in this and subsequent clauses. 
 Another example—and a problem that is particularly difficult to resolve—is that of intellectual property. Companies may have to value their intellectual property and start charging royalties to UK-group companies for that use. We can all think of a number of market sectors in which that will be particularly relevant. Examples include oil and gas, and the pharmaceutical industry. 
 The Chairman's attention having been called to the fact that eleven Members were not present, he suspended the proceedings. 
 Other Members having come into the Room and eleven Members being present, the proceedings were resumed.

Mark Prisk: One could get a complex. The moment one starts to talk about UK-UK transfer pricing and thin capitalisation, Committee members' attention wanders.

Stephen Pound: So does the Committee.

John McWilliam: Provided that my attention does not wander, we will be all right.

Mark Prisk: Thank you, Mr. McWilliam. I have no doubt that there will be a lengthy and, as always, intellectual discourse on the issue from the hon. Member for Ealing, North.
 The hon. Gentleman's attention, and that of the Committee, has been grasped by the question of intellectual property. Companies face the possibility of needing to value their intellectual property and therefore of starting to charge the respective royalties to companies in the group. I tried to refer to that question in relation to the oil, gas and pharmaceutical industries. 
 To take an example from my constituency area, we have an outstanding research and development facility in the GlaxoSmithKline operation at Ware. In Hertfordshire, and in Harlow in neighbouring Essex, there is a number of related companies within the group. 
 As we can imagine, one of the problems is the complexity of trying to value the intellectual property developed at the company based in Ware, and establishing whether as an organisation it needs to charge royalties to the other companies for that development and assessment. That is one of industry's worries. Hopefully, the Minister will be able to put minds at rest. 
 Head office costs, intra-group loans and intellectual property are just three potential elements of a significant compliance burdens that the clause would seek to impose. Therefore, we are talking not simply about another set of files, a little more paperwork or an adjustment to a software program but, possibly, for many organisations, the need to reorganise their structure or to restructure financially how they operate.

John Burnett: I do not want to be unhelpful, but I hope that the hon. Gentleman will deprecate artificial transactions—transactions that artificially invest intellectual property in low tax regime countries.

Mark Prisk: I am grateful to the hon. Gentleman but that is not the point that we are examining, which is whether the new arrangements in the clause would force organisations to make that change. I understand the situation elsewhere, but the question is whether there is a compliance burden that would otherwise not be expected. That is the essence of my concern.

John Burnett: I take the point that without anti-avoidance provisions on transfer pricing we could have severe leaching, or loss, which is the word that I should use, of tax revenue. The hon. Gentleman is right on the
 nail when he talks about bureaucracy and if I am fortunate enough to catch your eye, Mr. McWilliam, I will say a few words on that point as well.

Mark Prisk: I am grateful to the hon. Gentleman. Just when we thought that his smooth tongue was about to ingratiate himself with all of us, he moves us on to a different aspect of his scrutiny capabilities. He is right to highlight the fact that there is a danger of leaching and I will discuss that in a moment.
 At the heart of my first point is the potential compliance burden that is a consequence of the change in this clause and related ones. That is why the policy has met with quite a lot of concern among the business community. I fully accept that the Government have made some useful concessions. However, many experts, including the Confederation of British Industry, feel that business needs more time in terms of implementation. I will quote one leading expert in the field. Mr. Steve Hasson, who is the head of transfer pricing at PricewaterhouseCoopers, said: 
''It's understandable that the Government wants to put its house in order, but one has to question why they have to put so much pressure on business in such a short timescale. Our clients have voiced their opinion—over 50% would like to see the start date delayed by more than a year.''
 That was based on a quite detailed survey of that company's clients in January. 
 It seems peculiar that companies are being required to produce documentation that would not have been required for any commercial reason. Yet, in many cases, although not all, there may be no additional UK tax at stake. The clauses represent a big administrative outlay and some businesses will ask the question: for what purpose? 
 I am sure that the Committee will wish to consider the background to that, which is the Inland Revenue's concern about the possible implications for the sustainability of UK tax law following the decision in the Lankhorst v. Hohorst case at the European Court of Justice. Many experts have informed me, both from the taxation and from the legal point of view, that the Inland Revenue has been advised that it would not be possible to return to what I think is termed a direction base regime without the threat of action for non-compliance with EU law at the ECJ. 
 Will the Paymaster General tell the Committee what her understanding is of such a potential challenge? Is she certain that the proposed changes in this and the related clauses, and in schedule 5, and their implementation will not also be open to challenge? There seems to be considerable expert opinion that devising something that is not open to challenge will be extremely difficult. Obviously, the key element is the question of discrimination. I am sure that she will want to respond. 
 Many representative bodies have highlighted that the United Kingdom's approach is the equivalent of what I believe is termed downward harmonisation. I refer briefly to the view of the Institute of Chartered Accountants: 
''Our concern is that this will reduce the competitiveness of the UK and is not consistent with the stated EU Lisbon Agenda''—
 on which the Chancellor is keen— 
''which is to create in Europe the most dynamic knowledge-based economy in the world by 2010.''
 The Confederation of British Industry stated in a briefing that it supplied to members of the Committee that it is 
''very concerned that the measures on transfer pricing and thin capitalisation are being taken forward too quickly, and in isolation from other aspects of the corporation tax system such as group relief which are similarly potentially subject to intervention by the ECJ.''
 The CBI goes on to an important related point: 
''As the issues arising from ECJ decisions are so inter-related, it would have been much better to take more time to devise a coherent holistic approach to addressing incompatibilities between the UK corporation tax and the EU treaties.''
 It then deals with other aspects, but I shall not stretch your patience too much with the broader questions, Mr. McWilliam. 
 The point is that other EU countries have taken different approaches, some of which have merit, some of which do not. Spain, for example, has chosen to disapply its thin capitalisation and related provisions for all intra-EU transactions. Can the Paymaster General explain her Department's views on alternative approaches? That would help inform us as to the basis, or the foundation, of the clause.

John Burnett: I do not want to make too contentious a point. Nevertheless, I noted the comments in briefings on the Bill about the attitude of the Spanish. I am concerned that that approach, if adopted, would accelerate the trend to European Union tax harmonisation, which I would personally deprecate. In addition, does the hon. Gentleman agree that courts would give some weight to the steps taken by the Spanish Government and that EU courts are already encroaching far too much, especially on our corporation tax?

Mark Prisk: I can understand why the hon. Member for Torridge and West Devon is not with his leader at his party's launch of its European election campaign today.

John Burnett: Certainly not.

Mark Prisk: I am sure that the Committee will note those last two words, ''Certainly not''.
 I share the hon. Gentleman's concern about the danger of leaching, which leads to my next point. Conservatives—and, evidently, some Liberal Democrats—recognise the natural wish of the Treasury to maintain national sovereign control over our tax base. However, significant compliance burdens are being created in the clause and elsewhere. We have therefore tabled amendments that seek to relieve those burdens.

John McWilliam: Order. May I just bring the Committee's attention to the fact that the provision in clause 30 is purely for transactions between UK taxpayers, not Spanish taxpayers or any other variety?

Mark Prisk: I am grateful to you, Mr. McWilliam, for reminding us of that. I am sure that the Paymaster General will follow your guidance, as I intend to.
 Conservative Members are concerned about the piecemeal way in which the Government are dealing with the anomaly for UK transfers, which has been drawn forward by the case to which I referred. The worry is that no real strategy underpins their approach. In essence, our concern is that, although it is important to control any potential leaching, it is also important that the Government are able to respond to outside legal challenges through the changes in the Bill and that undue burdens are not placed on business. I look forward to the Paymaster General's response to those points.

John Burnett: I do not want to detain the Committee too long or steal the thunder of the hon. Member for Ealing, North.
 What I am concerned about—and what should concern the entire Committee—is that the clause will cause considerable additional bureaucracy with no apparent gain for the Exchequer. The new rules will place a huge compliance burden on larger UK companies, which will be required to maintain transfer pricing documentation for transactions with other UK companies. There will be little or no benefit to the Exchequer, so I ask the Paymaster General to answer the simple question: why are these steps being taken? Why are additional burdens being imposed on our larger companies?

Dawn Primarolo: May I start by making a couple of general points about the changes which were made by the hon. Members for Torridge and West Devon and for Hertford and Stortford? I shall state our position from the outset. The hon. Member for Hertford and Stortford implied—nay asserted—that this was something that the Government were rushing to do. However, we need to set the matter in the context of what business has been saying and doing as a result of what, it believed, produced uncertainty in the operation of transfer and, in particular, thin capitalisation.
 The Government are confident that our existing rules can and will be defended. They are consistent with internationally accepted principles of taxation, as promoted by the Organisation for Economic Co-operation and Development and reflected in the United Kingdom's bilateral treaties. We will continue to defend UK law against challenges in the courts. However, business tells us that there is uncertainty in the taxation position. That results from recent decisions in the European Court of Justice, and the interaction of those principles with European law—the hon. Gentleman referred to the Lankhorst case. 
 The uncertainty is such that many companies are at present actively keeping past tax computations open. The Government, not unreasonably, want to ensure that the corporation taxation system is robust and gives business certainty. Let us be clear therefore that the starting point is the interaction of certain judgments, business's perception of those interactions and consequent uncertainty leading to many companies leaving their tax affairs open or pursuing litigation. The Government are trying, in extensive consultation with business, to ensure that the taxation 
 system is robust and gives business certainty, which it says it does not have at the moment. That is all underpinned by the Government assertion that our system is defendable.

Mark Prisk: Will the Paymaster General give way?

Dawn Primarolo: May I dispose of the Spanish issue before I give way to the hon. Gentleman?
 I assume that the hon. Gentleman was drawing a comparison, but it was not a good one to draw because Spain already applies transfer pricing to domestic legislation. It has also made some other changes that we do not think appropriate; nor did business when we consulted it. What we have is widely accepted. We will come on to discuss the counterbalancing measures in the management expenses. Business identified uncertainty and wanted that clarified, but no organisations or representatives came forward with suggestions on how we could move back to a position of certainty in any other way. 
 I want to make sure that this is understood: the changes set aside clearly, once and for all, the uncertainty about the compatibility of transfer price and thin capitalisation laws with European law. It is a specific problem that business has described to us and it is the reason for the changes.

Mark Prisk: The Paymaster General is right. The whole purpose of raising the question of the Spanish approach was to try to identify and shade in the thinking behind the Government's decision. Certainly we would not wish to pursue the matter. I come back to the awkward question of discrimination, which is central to whether the clause will work or whether it can be challenged again. Can she confirm the thinking behind the clause and its compliance with EU law, so that we can understand her confidence that it will not be open to challenge?

Dawn Primarolo: That is appropriate. Having dealt with the general points that both hon. Gentlemen made in their contributions, I want to move to the clause, its provisions and the subsequent clauses to which the hon. Member for Hertford and Stortford referred in his opening remarks.

John Burnett: It is beyond my comprehension that a transaction within the UK should be recorded. Perhaps the right hon. Lady can explain the logic because it escapes me. Cannot large companies operate under the medium-sized company regime?

Dawn Primarolo: That difficulty arises because clauses 30 to 37 pick up each of the different points that have been identified, be that securitisation or the role of small and medium-sized companies and whether they require transfers within groups. All those matters are dealt with as we progress through the clauses. I have noted the hon. Gentleman's point, and I am sure that he will make it again on the relevant clause. Certainly I want to make it clear as we progress through these clauses that the Government are taking all possible steps and will require consultation with business.
 Finally, I stress to the Committee the fact that groups can adopt arm's-length principles. There is no need to restructure; it is not a requirement. Some may choose to do so. The hon. Member for Hertford and Stortford mentioned companies in his constituency. Companies are already trading across borders. They are already coping with the operation of transfer pricing and the arm's-length principle. They use it daily in running their businesses within their groups of companies both in the UK and across borders. 
 The Committee must keep focused on the principles of transfer pricing and why they need to be arm's length. This is not about investment, but about profit and where it occurs. It is a very compact set of principles, internationally accepted and well operated by the UK. They are principles that can be established on a UK-to-UK business, but we need exceptions and we need to assist small and medium-sized companies. I will return to that when we resume this afternoon. 
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock.